Inflation Rises Before Iran War Disrupts Oil Supply

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An inflation gauge closely monitored by the Federal Reserve moved higher in January, indicating that prices were persistently elevated even before the Iran war caused spikes in oil and gas costs. Prices rose 2.8% in January compared with a year earlier, while core prices, which exclude volatile food and energy categories, jumped 3.1% - the highest in nearly two years. The data has since been overtaken by the war with Iran, which began on February 28 and has shut down the Strait of Hormuz, cutting off one-fifth of the world's oil supply.

Why it matters

The inflation data suggests that the U.S. economy was already facing rising prices before the Iran war disrupted global oil supplies, putting further pressure on the Federal Reserve to keep interest rates elevated in an effort to cool inflation. The war has since caused oil and gas prices to spike, which will likely drive inflation even higher in the coming months.

The details

The personal consumption expenditures (PCE) price index, which is the Fed's preferred inflation gauge, rose 2.8% in January compared to a year earlier. Excluding the volatile food and energy categories, core prices jumped 3.1% - the highest in nearly two years. On a monthly basis, prices rose 0.3% in January, while core prices jumped 0.4% for the second straight month, a pace that would lift inflation far above the Fed's 2% annual target if sustained.

• The inflation data is from January 2026.
• The Iran war began on February 28, 2026.

What’s next

The Federal Reserve is expected to keep interest rates unchanged at its next meeting next week, despite the inflation data, as policymakers assess the impact of the Iran war on the economy.